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Can Albertsons Trounce Wal-Mart with Advanced Information Technology?
With 2,305 retail stores in 31 states,
Albertsons is one of the largest retail
food and drug chains in the world.
Among these retail stores are 1,351
combination food-drug stores, 707
standalone drugstores, and 247 con-
ventional and warehouse stores.
Stores flying the Albertsons flag
include Albertsons, Albertsons
Express, Albertsons-Osco, Albertsons-
Sav-on, Jewel, Jewel-Osco, Acme, Sav-
on Drugs, Osco Drug, Max Foods, and
Super Saver Foods.
Albertsons’ marketing vow is to
“Make Life Easier for Our Customers.”
This credo plays a large part in another
of the company’s priorities, which is to
make Albertsons the number one gro-
cer in the United States. Wal-Mart
currently holds that distinction with
$56 million in annual revenue from its
grocery departments. Albertsons
stands in third place, $20 million
behind Wal-Mart in revenue.
Wal-Mart has been selling groceries
for a mere 16 years, making it a rela-
tive newcomer in the industry com-
pared to most of its competitors. Of
course, Wal-Mart does have vast retail
experience, massive purchasing
power, and leading-edge systems to
apply to its grocery business to cata-
pult it ahead of the competition. Wal-
Mart’s supply chain management sys-
tems are extremely quick and
efficient. They keep inventory down to
the necessary minimums and operat-
ing costs low so that overhead takes a
much smaller chunk out of the com-
pany’s sales revenue. Wal-Mart’s
Retail Link network pulls in point-of-
sale data from its retail stores every
15 minutes, giving suppliers incredibly
up-to-date information on how their
products are selling. Other retailers
capture sales data only once or twice
each day.
To move up to the top rung of the
ladder, Albertsons has borrowed a
page from Wal-Mart’s book and writ-
ten a few new pages of its own. The
author of these efforts is CEO and
president Larry Johnston. Johnston
came to Albertsons from a highly suc-
Chapter 3 Information Systems, Organizations, Management, and Strategy 109
CASE STU DY
cessful corporate environment, having
worked under Jack Welch during the
peak of his tenure at General Electric.
Johnston wants to use information
technology to keep prices competitive
while making the shopping experi-
ence more compelling. He also wants
to bolster the company’s leadership
with the best minds available and use
motivational techniques to invigorate
his employees. By approaching busi-
ness strategy on these two fronts,
Johnston hopes to distance
Albertsons from competitors such as
Kroger and Safeway and catch up to
industry leader Wal-Mart.
Albertsons earmarked half a billion
dollars for technology advancements
in 2004. One goal of this investment
is to improve the company’s profit mar-
gin. Profit margins are razor-thin in
the supermarket business, averaging
around one cent per dollar of sales.
Currently, Albertsons earns 1.4 cents
for every dollar of merchandise that it
sells. Wal-Mart is famous for keeping
the prices of its merchandise low, but
still manages to earn more than 3 cents
for every dollar of sales. Albertsons
must close that margin if it is to
become the number one grocer in
the United States. Working against
Albertsons is the fact that its mer-
chandise sells for 20 to 25 percent
more on average than Wal-Mart’s
product offerings. Albertsons has a
wide gap to overcome.
The technology strategies put forth
by Larry Johnston cover a wide range
of the company’s operations.
Albertsons has begun to install self-
service checkout stations in some of
its stores. These stations enable cus-
tomers to scan the items they are
buying to create a sales bill and pay
for the items by swiping a credit or
debit card, all without the interven-
tion of a cashier. Using a handheld
scanner, customers may scan their
purchases as they place them in their
shopping cart, resulting in a checkout
process that may take only a few sec-
onds. Not having to wait in line to pay
at the supermarket can be a major
draw for customers. Albertsons views
this improvement to the shopping
experience as exactly the type of
change it wants to implement to keep
its current customers happy, bring in
new customers, and thereby increase
sales revenue.
Of course, self-service checkout
stations provide Albertsons with
another benefit: They cut personnel
costs. The stations enable Albertsons
to replace human cashiers with
machines that do not earn wages.
Cutting payroll is a critical aspect of
the company’s repositioning, espe-
cially when you compare wage num-
bers with Wal-Mart. The average Wal-
Mart worker earns about $8.50 per
hour. Albertsons pays its average
worker in the neighborhood of $13
per hour. In addition, Albertsons
extends benefits to its employees,
including health insurance and retire-
ment packages that, in some cases,
nearly double the value of the
employee’s total compensation. The
company line says that installing self-
service checkout facilities is intended
solely to create a better shopping
experience for the customer. Retail
analysts seem to think otherwise, say-
ing that such claims are transparent;
eliminating cashier positions could
produce savings in excess of $100
million for Albertsons.
Larry Johnston’s plans for
technology-enabled grocery stores
include a completely digital shopping
experience that begins in the home
and involves the Internet and Global
Positioning System satellite technol-
ogy. Customers would be able to set
up their shopping lists from home
through an Internet portal that is con-
nected to their local Albertsons store.
They could also add information to
their accounts such as allergies and
dietary restrictions. When customers
arrive at the store, they would use a
customer loyalty card to obtain a
handheld device. The device would
download the shopping list and any
other important information, and then
sync up with the store’s inventory. The
LAUDMC03_0131538411.QXD 2/1/05 8:40 AM
110 Part One Organizations, Management, and the Networked Enterprise
device would guide customers
through the store on the most effi-
cient path to gather and scan all of
their items. In addition, customers
could receive text messages notifying
them about special offers, photos and
prescriptions ready for pickup, and
conflicts between scanned items and
the customer’s preset dietary or
allergy restrictions. Under such a sys-
tem, a customer account could be
linked to a credit card and checkout
would be reduced to passing through
an electronic gate.
Introducing such a radical change
in shopping habits will not be easy.
For now, Albertsons has deployed
handheld scanning devices in only a
few stores. To roll out widespread use
of the scanners and self-service
checkout, as well as Johnston’s
grander vision of a wired supermar-
ket, Albertsons will have to persuade
two important groups of people that
such changes are a good idea. The
company will have to convince its
store employees that a more inde-
pendent customer is good for busi-
ness. At the same time, the employ-
ees know that some of their services
will be rendered unnecessary, thou-
sands of their colleagues have lost
their jobs already, and they have run
into strong resistance in their pursuit
of higher salaries and better benefits.
The attitude of the employees is criti-
cal to the success of the company and
there are no assurances of coopera-
tion with a vision that could reduce
their role.
As if that weren’t enough of a con-
cern, Albertsons’ customers also
would have to buy into Johnston’s
vision for high-tech shopping. Michael
Lenz, a retail supply-chain analyst for
the Canadian firm Thinking Group,
notes, “You’re going to the store for
bread, milk, and eggs. It might be a
little overwhelming for some folks.”
Wal-Mart explicitly tries to keep tech-
nology in the background to keep
customer shopping experiences sim-
ple. On the other hand, if Johnston’s
futuristic store proves to be success-
ful, Albertsons would gain a signifi-
cant edge over Wal-Mart.
Another Albertsons goal is simply
to have current customers buy more
when they visit the store. The key to
Page 110
such a goal is cataloging and analyz-
ing purchase data. Albertsons
invested $50 million in an NCR
Teradata warehouse to examine cus-
tomer buying habits. By providing
customer loyalty cards, Albertsons can
give loyal customers special offers
and track exactly what they buy and
when they buy it.
Analytics software from KhiMetrics
of Scottsdale, Arizona, enables
Albertsons to determine, for example,
whether lowering the price of a box
of Wheaties by 15 cents will bring in
more profits by increasing sales than
would increasing the price by 15
cents. The software will also tell
Albertsons which products, such as
milk and bread, need lower prices to
prevent shoppers from defecting to
Wal-Mart and which items aren’t so
critical.
Albertsons is working to reduce
costs in its supply chain so that its
stores can offer prices that are more
competitive with Wal-Mart’s prices.
Johnston has consolidated distribu-
tion centers and is using the Web to
coordinate shipments and to reduce
billing and invoicing costs. The com-
pany has also upgraded its core cor-
porate systems, moving financial
applications to software from Oracle
and its human resources manage-
ment to PeopleSoft software.
Chief Technology Officer Bob Dunst
intends to overhaul 90 percent of the
company’s applications by 2007. In
addition to the Oracle and PeopleSoft
adoptions, he has also upgraded the
company’s high-speed network infra-
structure. Albertsons had already
added electronic data interchange
(EDI) capabilities, which enable better
processing of transactions with sup-
pliers. However, Albertsons does not
yet have a system comparable to Wal-
Mart for sharing sales data with sup-
pliers and for automatically placing
orders in reaction to sales that are
taking place in the field.
Albertsons will not be relying solely
on computing power in its pursuit of
Wal-Mart. CEO Johnston believes that
brain power is just as critical to the
success of his company as technology
is. Johnston scoured corporate
America for the most talented and
respected executives in retail and
other industries. He hired CTO Dunst
away from competitor Safeway, where
Dunst had 25 years of experience
developing applications, working with
loyalty card systems, and using
advanced technology to analyze data.
The supply chain management team
has been stocked with technology
pioneers and top guns who bring
their expertise from such companies
as PepsiCo, Dell, and even Wal-Mart.
Analysts are impressed with the
crew that Johnston has assembled
and believe that he is taking the right
approach to competing with Wal-
Mart, but the benefits of a first-rate
staff have been slow to materialize.
The question remains whether a mas-
sive investment in technology and
intellect will be enough for Albertsons
to reach the top of the industry. Wal-
Mart is a moving target and it contin-
ues to move faster and farther.
Johnston has saved Albertsons
approximately $500 million already,
but sales haven’t increased signifi-
cantly. Meanwhile, Wal-Mart’s grocery
sales continue to grow steadily.
Also worrisome is the introduction
of Wal-Mart’s Neighborhood Markets.
Wal-Mart is traditionally known for its
Supercenters, big-box stores that
cover expansive square footage and
offer extensive product selection. The
Neighborhood Markets are signifi-
cantly smaller and are intended to
reach the local markets that aren’t
always covered by a Wal-Mart big-box
store. In many cases, these markets
contain the customers that Albertsons
has targeted as crucial to its success.
Albertsons has already lost signifi-
cant market shares to Wal-Mart
Supercenters in various parts of the
country, including Boise, where
Albertsons headquarters are located.
Between 2000, when Wal-Mart came
to Boise, and 2004, Albertsons saw its
market share drop from 65 to 39 per-
cent, with nearly all of the loss bene-
fiting Wal-Mart. Wal-Mart’s
Neighborhood Markets are strength-
ened by the same low prices and
powerful supply chain that make the
company’s Supercenters a seemingly
unstoppable force. Other than self-
service checkout stations, the
Neighborhood Markets are decidedly
no-frills in comparison to the average
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Albertsons store, which often has its
own butcher, baker, and gourmet cof-
fee bar. Albertsons is betting that a
specialized, customized, and techno-
logically advanced shopping experi-
ence will be appealing enough to
keep customers from the allure of
Wal-Mart’s lower prices and simple
presentation. It is not a sure bet.
Albertsons may not be able to beat
Wal-Mart consistently on price but it
must come closer than in the past.
Albertsons can also use its loyalty
card program to obtain more precise
information about individual cus-
tomers and offer products that they
might not find on Wal-Mart shelves.
Albertsons has the financial backing
to continue investing heavily in
advanced information technology,
and it is fortified by strong chains of
drug stores, which tend to see greater
profit margins than grocery stores.
The company has recently joined Wal-
Chapter 3 Information Systems, Organizations, Management, and Strategy 111
Mart in requiring (by April 2005) its
suppliers to use radio-frequency iden-
tification (RFID) tags on all product
shipments. The use of RFID will
increase Albertsons’ ability to manage
its supply chain more precisely.
Additionally, Albertsons stores have
fared well in urban markets where
Wal-Mart has struggled. Overall, how-
ever, Wal-Mart has set the bar very
high. Albertsons remains convinced
that it can soar to greater heights.
Sources: Mel Duvall and Kim S. Nash,
“Albertson’s: A Shot at the Crown,” Mel
Duvall, “Roadblock: Internal Resistance,”
David F. Carr, “Gotcha! The Problems with
Self-Service Checkout Systems,” and Todd
Spangler, “Teradata: Too Rich for Your
Blood?” Baseline Magazine, February 1,
2004; Jonathan Collins, “Albertsons
Announces Mandate,” RFID Journal, March 5,
2004; Associated Press, “Albertsons to Test
Handheld Grocery Scanners,” USA Today,
March 29, 2004.
CASE STUDY QUESTIONS
1. Analyze Albertsons using the value
chain and competitive forces
models.
2. What role do information systems
play in Albertsons’ business strat-
egy? How do systems provide
value for Albertsons?
3. Compare Albertsons to Wal-Mart in
terms of business strategy, current
success, and future success.
4. Which management, organization,
and technology factors hinder
Albertsons from achieving the
goals of its business strategy?
Which management, organization,
and technology factors help
Albertsons achieve its goals?
5. Do you think Albertsons’ busi-
ness strategy will work? Why or
why not?